The Impact of Trade Liberalization on the Aggregate Financial Performance of Firms

This research paper theoretically and empirically investigates the role of resource, market share and profit reallocations in explaining the impact of trade liberalization on the aggregate performance of firms. A theoretical model, which is largely based on the model by Melitz (2003) and incorporates firm heterogeneity in the total factor productivity parameter, argues that the financial performance of firms can be used as an accurate proxy for productivity. The theoretical results suggest a positive impact of trade liberalization on the sector-wide aggregate financial performance of all firms active in an industry, but an insignificant impact of trade liberalization on the average performance of exporters. The empirical analysis, employing firm level data on 27 Eastern European and Central Asian countries over the period 2002-2009, confirms the theoretical predictions. In particular, it is shown that, independent of the different dependent variables used and the econometric estimation procedures followed, trade liberalization has a significantly positive impact on the sector-wide average financial performance of firms. Additionally, it is proven that among exporters, trade liberalization does not have a significant impact on aggregate performance